Why big orders deserve a wider quote

Question

You quote in a request-for-quote market where you can price by order size. From your data:

Small orders ( $100$ shares): only $5\%$ are informed.
Large orders ( $5{,}000$ shares): $40\%$ are informed.

When an informed order trades against you, the value moves an average of $\$ 0.20$ against your position.

What break-even half-spread should you quote for each size? Why does the same fair value produce two very different quotes?

Accepted Answer

Break-even half-spread = (informed fraction) × (adverse move). A quote breaks even when the half-spread you collect on every fill offsets the expected toxic hit, s^ = p \cdot L with L = \0.20. Small orders (p = 0.05): s^{	ext{small}} = 0.05 	imes 0.20 = \0.01 = 1 	ext{ cent.} Large orders (p = 0.40): s^{	ext{large}} = 0.40 	imes 0.20 = \0.08 = 8 	ext{ cents.} So around the same fair value, you'd fill a 100-share order just 1 cent off mid but a 5{,}000-share order 8 cents off mid, an eightfold-wider quote for the bigger clip. Why size predicts toxicity. Someone who genuinely knows someth…

Why big orders deserve a wider quote

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